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Homework answers / question archive / With celebrity bonds, celebrities raise money by issuing bonds to investors

With celebrity bonds, celebrities raise money by issuing bonds to investors

Finance

With celebrity bonds, celebrities raise money by issuing bonds to investors. The royalties from sales of the music are used to pay interest and principal on the bonds. In April of? 2009, EMI announced that it intended to securitize its back catalogue with the help of the Bank of Scotland. The bond was issued with a coupon rate of ?6.9% and will mature on this day 23 years from now. The yield on the bond issue is currently ?6.35%. At what price should this bond trade? today, assuming a face value of ?$1000 and annual?coupons?

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Face value = 1000

Coopen rate = 6.9%

Yeild rate =6.35%

Maturity = 23 years

Annual coopon amount= 1000*6.9/100 =69

Current bond price = present value of coupon payments + present value of redumption amount

1) present value of coupon payments

= 69*pvaf (6.35%,23 years)

=69*11.926 = 822.894

2) Present value of redumption amount

=1000*pvif (6.35%, 23 years)

= 1000*0.2427= 242.7

Price of bond = 822.894+242.7= 1065.59

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